Puerto Rico retirement system bondholders ask court to name them trustees
SAN JUAN – Secured creditors of the Puerto Rico Employees Retirement System (ERS) are seeking to become trustees of the retirement system to pursue certain claims against the commonwealth for “illegally transferring” ERS assets to the general fund.
The ERS bondholders seek to pursue “avoidance actions” against the commonwealth and that the assets be transferred back to the pension fund. The ERS bondholders said they would also be willing to accept a third-party fiduciary as trustee.
Avoidance or rejection actions are typically brought against corporations and individuals who have received payments from the debtor within 90 days of the filing of a bankruptcy or one year if to an insider or relative. There are primarily two types of avoidance actions, preferences actions and those seeking to avoid fraudulent transfers.
Until legislation that went into effect in July 2017, the ERS, which filed for bankruptcy in May 2017, was funded by contributions from employers and employees. The commonwealth has never paid the ERS enough contributions to satisfy its statutory requirements, owing it some $411 million as of 2017. In 2008, the ERS sought outside funding by issuing about $3 billion in bonds.
After the ERS filed for bankruptcy and while there was a stay on litigation, the Financial Oversight and Management Board for Puerto Rico adopted a resolution on behalf of the governor that dismantled the ERS and transferred its net proceeds and assets to the general fund. In August 2017, the governor enacted the Pay Go system, whereby employers must pay directly into the general fund. These were the same entities or agencies that were required to make payments into the ERS, the bondholders say.
“ERS has a right to receive those contributions,” the bondholders said in a motion filed Feb. 19 by their attorneys from Jones Day.
On Jan. 28, the bondholders asked the fiscal board to pursue the claims against the government, but claim it failed to respond. Further, they noted, the board has a conflict of interest and cannot put a stop to what they described as the illegal transfer of assets.